THERE ARE BILLIONS OF DOLLARS IN UNDETECTED TAX REFUND
FRAUD RESULTING FROM IDENTITY THEFT

Issued on July 19, 2012

Highlights

Highlights of Report Number: †2012-42-080 to the Internal Revenue Service
Commissioner forthe Wage and Investment
Division.

IMPACT ON TAXPAYERS

Undetected tax refund fraud results in significant unintended
Federal outlays and erodes the confidence in our Nationís tax system.† Our
analysis of tax returns using characteristics of IRS-confirmed identity theft
identified approximately 1.5 million undetected tax returns with potentially
fraudulent tax refunds totaling in excess of $5.2 billion.† TIGTA estimates the
IRS could issue $21 billion in potentially fraudulent tax refunds resulting
from identity theft over the next five years.

WHY TIGTA DID THE AUDIT

This audit was initiated at the request of
the Chairman of the Senate Finance Committee,
Subcommittee on Fiscal Responsibility and Economic Growth.† The overall
objective of this review was to evaluate the effectiveness of the IRSís efforts
to identify and prevent fraudulent tax refunds resulting from identity theft.

WHAT TIGTA FOUND

The impact of
identity theft on tax administration is significantly greater than the amount the
IRS detects and prevents.† Using the characteristics of confirmed identity
theft, TIGTA identified potentially fraudulent tax refunds in excess of $5.2
billion that were issued by the IRS.†

The IRS has expanded
its efforts to detect and prevent identity theft.† However, delayed
access to third-party income and withholding information makes it difficult for
the IRS to detect fraudulent tax refunds at the time tax returns are
processed.† Third parties are not required to submit income and withholding
documents to the IRS until March 31, yet taxpayers can begin filing tax returns
in mid-January.†

While the
IRS does not have access to all third-party information documents at the time
tax returns are filed, some third-party information is available.† However, the
IRS has not developed processes to obtain and use this third-party
information.†††

Lastly,
the use of direct deposits, including debit cards, to claim fraudulent tax
refunds also contributes to the increased risk that the IRS will not detect identity
theft.†

WHAT TIGTA RECOMMENDED

TIGTA made seven recommendations for the IRS
Commissioner, Wage and Investment Division, to develop or improve processes
that will increase the IRSís ability to detect and prevent the issuance of
fraudulent tax refunds resulting from identity theft.† In addition, TIGTA
recommended legislation to expand the IRSís access to and authority to use the
National Directory of New Hires database for the purposes of identifying
identity theft.

The IRS agreed with TIGTAís recommendations
and has taken or plans to take corrective actions.† However, in view of its
ongoing efforts to improve the detection of identity theft, the IRS did not
agree with TIGTAís estimate of $21 billion in potentially fraudulent refunds as
a result of identity theft over the next five years.† TIGTA agrees that the
IRSís ongoing efforts will help reduce fraudulent refunds.† As such, TIGTAís
estimate of $21 billion includes an annual reduction factor to reflect the
dollar amount that the IRS estimated it protected by implementing new filters.

READ THE FULL REPORT

To view the report, including the scope, methodology,
and full IRS response, go to: